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Why do cross-listed firms voluntarily adopt Regulation Fair Disclosure? Michael Crawley University of Texas at Austin Bin Ke Pennsylvania State University.

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Presentation on theme: "Why do cross-listed firms voluntarily adopt Regulation Fair Disclosure? Michael Crawley University of Texas at Austin Bin Ke Pennsylvania State University."— Presentation transcript:

1 Why do cross-listed firms voluntarily adopt Regulation Fair Disclosure? Michael Crawley University of Texas at Austin Bin Ke Pennsylvania State University Yong Yu University of Texas at Austin

2 Research questions 1. Why do cross-listed firms voluntarily adopt REG FD that they are explicitly exempt from? 2. What are the market consequences of the voluntary adoption to the adopters?

3 Regulation FD REG FD (effective 10/23/00) prohibits management from sharing material nonpublic information with selected investors. REG FD was one of the most controversial rules passed by SEC, generating nearly 6000 comment letters and resulting in a rare split-vote decision. Proposed rule (12/15/99): foreign firms were included. Final rule (08/10/00): foreign firms were explicitly exempted. A 2004 Bank of New York survey of 143 large cross-listed firms reported that 54% of the firms voluntarily adopted REG FD.

4 Summary of main findings 40% of the 181 active cross-listed firms who responded to our survey state they have voluntarily adopted REG FD as part of their formal disclosure policy. Cross-listed firms voluntarily adopted REG FD in response to externalities from U.S. firms’ forced adoption of REG FD: –U.S. (esp. retail) investors would have a reduced demand for cross-listed firms that do not follow REG FD (denoted investor demand effect) –U.S. firms’ forced disclosure under REG FD would create an information spillover effect on cross-listed firms, resulting in the unraveling of cross-listed firms’ private information (denoted information spillover effect). However, cross-listed firms that are expected to suffer from increased disclosure transparency are less likely to follow REG FD. Relative to non-adopters, adopters have a decrease in bid-ask spread and an increase in share turnover.

5 Sample Initial sample: all ADR firms listed on NYSE / AMEX / NASDAQ between 1/1/2000 and 12/31/2005 : –552 ADR firms (422 active and 130 inactive) –Exclude Canadian firms Survey on REG FD adoption: –four rounds of s –Phone calls to US offices and headquarters in home country 189 usable answers from 203 respondents (8 from inactive firms and 181 from active firms). 43% response rate for active firms. Final sample: 178 active ADR firms (3 firms lost due to further data requirements)

6 Determinant of FD adoption Proxies for the externalities –Investor demand – institutional ownership (-) –Information spillover – foreign sales (+) Control variables –Investment opportunities – sales growth (+) –External financing – the difference between actual growth and the sustainable growth with retained earnings and debt financing (+) –Managerial agency costs CONTROL1: managers have the largest voting rights and their voting rights exceed cash flows rights (-) CONTROL2: managers have the largest voting rights and their voting rights are equal to cash flow rights –Information asymmetry – analyst following (-) and total assets (-) –Proprietary costs – industry Herfindahl index (-) and industry profitability persistence (-) –Financial disclosure complexity – high-tech industry (-), standard deviation of scaled net sales (-), intangible assets (-)

7 Table 1: Descriptive statistics Mean (median) [STD] Variable name (1) Respondents who adopted REG FD (N=70) (2) Responders who did not adopt REG FD (N=108) Ranksum test’s two- tailed p value INSTITUTIONOWN0.383 (0.233) [0.385] (0.460) [0.360] FOREIGNSALE0.469 (0.524) [0.353] (0.239) [0.326] INVEST_OPP0.618 (0.211) [1.545] (0.078) [0.351] <0.001 EXTERNAL_FIN0.723 (0.093) [2.650] (-0.047) [0.387] ASSETS65, (5, ) [163, ] 29, (4, ) [75, ] ANALYST3.743 (1.000) [5.129] (2.000) [3.064] CONTROL (0.000) [0.234] (0.000) [0.475] <0.001 CONTROL (0.000) [0.413] (0.000) [0.406] 0.890

8 Table 1 (cont’d) Variable name (1) Respondents who adopted REG FD (N=70) (2) Responders who did not adopt REG FD (N=108) Ranksum test’s two- tailed p value SUBSTITUTION1.168 (1.132) [0.150] (1.141) [0.159] MKTSIZE160, (12, ) [317, ] 66, (8, ) [184, ] ENTRYCOST5, ( ) [10, ] 6, (1, ) [12, ] HIGH_TECH0.357 (0.000) [0.483] (0.000) [0.456] STD_REV0.284 (0.190) [0.281] (0.156) [0.197] INTANGIBLE0.090 (0.016) [0.166] (0.013) [0.125] 0.910

9 Table 2: LOGIT model of REG FD adoption determinants (1) All adopters vs. non- adopters INSTITUTIONOWN ** (0.562) FOREIGNSALE+2.544*** (0.916) Observations178 Pseudo R Likelihood ratio χ Model p-value<0.001

10 Table 3, Panel A: The effect of REG FD adoption (level regression) (1)(2)(3) The dependent variable = LN(SPREAD)LN(TURNOVER)LN(VOLATILITY) Regression coefficient (standard error) ADOPT-0.937***1.375***0.173 (0.258)(0.421)(0.239) LN(MARKETCAP)-0.141***0.110** (0.029)(0.048)(0.027) LN(TURNOVER)-0.155*** (0.046) LN(VOLATILITY) *** (0.085)(0.135) FREEFLOAT (0.203)(0.338)(0.192) BETA0.221** (0.091) Constant-3.783***-4.691***-3.812*** (0.469)(0.699)(0.319) Inverse Mills ratio (0.179)(0.300)(0.170) Observations167

11 Table 4, Panel A: Effect of REG FD adoption (change analysis) Non-adopters (N=63) Adopters (N=36) Two-tailed ranksum test p value on the difference in difference ΔSPREAD (-0.037) [0.827] Signed rank test P= (-0.601) [1.192] Signed rank test P= ΔTURNOVER (-0.086) [1.443] Signed rank test P= (0.519) [1.016] Signed rank test P= ΔVOLATILITY (0.003) [0.740) Signed rank test P= (-0.165) [0.819] Signed rank test P= Mean (median) [STD]


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